Monthly Archives: February 2016

Breadth from Twitter Stream Improves

On Friday, breadth calculated between the most bullish and most bearish stocks on Twitter crossed back above the zero line. The recent rally brought with it strong bullish readings in enough stocks to overwhelm the bearish stocks. This is a constructive sign… maybe. I’m hedging because I suspect the indicator has a bullish bias.

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The breadth indicator is built on top of our bullish and bearish algorithm that reads the Twitter stream for about 650 stocks. It is in part a sentiment indicator because many market participants tweet opinion about the future direction of stocks. The algorithm also captures action (buying, selling, hedging), fundamental analysis, and technical analysis… which is often influenced by “opinion”.  Unfortunately, we humans tend to let emotion cloud the facts. Fortunately for our everyday lives, we’re an optimistic species. Unfortunately, that is where the problem for the breadth indicator lies. We are more likely to buy stocks than sell them short. We are more likely to tweet about stocks that we own that are going up, than stocks that we own that are going down. We are more likely to tweet technical analysis indicators that align with our opinion… which for most of us is optimistic. For those reasons (and many more) I suspect that the breadth indicator has an inherent bullish bias. As a result, I’m guessing the bear trigger and the bull trigger might lie at different levels (more on that below).

The breadth indicator has proven its worth over its three years of history by not turning negative until 1/19/16. The signal coincided with several other intermediate and long term indicators that I follow — it’s always good to see a new indicator be confirmed by older, more proven indicators. Here are some examples of their bearish signals.

On 8/31/15, monthly MACD for the S&P 500 Index (SPX) clearly broke its uptrend. Monthly Momentum looks like it will close this month with a clear bearish signal.

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Weekly MACD and RSI for SPX started showing clear bearish signs in January by turning down from near 50 and zero respectively.

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Dow Theory signaled a bear market on 2/11/16.

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So taken all together, our breadth indicator’s bear market signal is safely nestled between several other indicators that are calling for a long term bear market. Unfortunately, it has now moved back above zero without any confirmation from the other indicators. This could be because it is a vastly superior indicator… but I doubt it. 😉  As I mentioned above, I suspect the indicator has a bullish bias, which would result in whipsaws during bear markets if you use the zero line to signal a bull market. We’ll have to collect more data before I can make an “official” call, but I’m guessing that the way to use the indicator will be to start selling rallies when breadth dips below zero, but use a trigger of +20 or +25 to start buying dips.

Another sign that we’ve entered a bear market comes from the daily momentum and sentiment readings generated from Twitter for SPX. Notice that it is spending many more days below zero than above. Add to that the bullish readings are generally lower than they were before July of 2015 and it paints a negative picture. Another concerning sign for the near future is that 7 day momentum has flat-lined below zero. If it rolls over, we should expect another trip back to the recent lows.

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Support and resistance gleaned from Twitter is starting to show some scattered hope, with a strong level of support between 1800 and 1810 for SPX. Each day that passes with traders still tweeting those levels makes it more critical support. There is a small cluster of resistance building at 2000 on SPX, but for the most part traders are showing their uncertainty by tweeting price after it’s been achieved. Bulls want to see the market hold 1940.

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Sector sentiment is showing all sectors but one as positive. When every sector is positive it almost always marks a short term top so we may be getting close.

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Conclusion

Breadth is back above zero, but I’m guessing the signal is premature. Other technical analysis indicators aren’t confirming, and neither is 7 day momentum. We’re still likely in a bear market, so a failure of 7 day moment from here should carry price back to recent lows… at the least.

 

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Sentiment Rolling Over

Sentiment generated from the Twitter stream for the S&P 500 Index (SPX) is rolling over from below the zero line again. This usually means a sharp fall in price. The odds now favor another test of recent lows before a significant rally.

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Breadth between bullish and bearish stocks on Twitter is showing a constructive pattern. During the recent rally we got a good increase in the number of bullish stocks. This indicates that buying is occurring in leading stocks. Keep an eye on this indicator (and the type of stocks in the 1 month bullish list) during this next dip. If it can hold up then I think we may be able to get a rally that makes it back to the 200 day moving average.

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Watching the Range

It looks like the most important thing to watch next week will be the range on the S&P 500 Index (SPX) between 1810 and 1940. Price targets from traders tweets are starting to create clear support and resistance at those levels. If we get a break, either up or down, expect a strong move in that direction. The only caveat is the cluster of support between 1780 and 1800 could help the market catch, so if you’re a bear don’t get too excited unless 1780 is broken to the downside.

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7 day momentum from Twitter for SPX is trying to break its downtrend line. This is a slightly positive sign, but is tempered by the fact that it is still below zero and there is no positive divergence. I’d be cautious until those two conditions have been cleared.

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Another small positive sign is breadth from the Twitter stream is ticking up due to the number of bearish stocks falling this week. Bulls want to see this trend continue.

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Conclusion

Be patient and watch the range between 1810 and 1940 on SPX. When it breaks we should get a strong move in the same direction.

 

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Counter Trend Bounce Soon

I’m seeing a few signs that we’re close to getting a counter trend bounce in the S&P 500 Index (SPX). The most compelling sign comes from stock market sector sentiment generated from the Twitter stream. In bull markets when every sector was positive on a weekly basis it almost always marked short term tops. We’re now in a bear market and all sectors are negative. I view this as a capitulation of sorts, where traders and investors are selling everything. This is the first time since we’ve been collecting the data that I’ve seen this condition, but the track record of all positive sectors in a bull market gives some credence to the current condition being short term bullish.

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The number bullish stocks on Twitter continues to tick up slightly even as the market puts in lower lows. This is a sign that some value buying is occurring under the surface. Value buying can cause a short covering rally if it pushes the price of beaten down stocks up enough. Keep an eye on the number of bullish stocks going forward. If it can make a strong move to the upside we should get a decent bear market bounce. You can see the daily updates here. One other thing of note in the breadth chart is that the count of bearish stocks is in a relentless uptrend. It barely dipped during the last counter trend bounce, which indicated that market participants were selling into that bounce. Another thing to watch going forward is of course the breadth line itself. It is still below zero, which signals we’re in a long term bear market. As a side note, Dow Theory signaled a bear market last Thursday. I love it when several indicators tell the same story because it makes it much easier to set aside bias.

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The daily and 7 day momentum reading from Twitter for SPX are also signaling that we’re in a bear market. Notice that during bull markets the daily indicator prints mostly above zero with only small dips below. Now it is printing mostly below zero with intermittent positive readings. In addition, 7 day momentum and sentiment is dipping to much lower levels before becoming oversold (and peaking at much lower levels). This week, 7 day momentum gave a -16 print which is fairly oversold, but I consider -20 extremely oversold and the place we’re likely to see sustainable bounces to start.  A break of the confirming downtrend in 7 day momentum would signal the counter trend bounce is underway. You can see daily updates to the chart here.

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Support and resistance from traders tweets for SPX once again shows no hope for higher prices. However, a good cluster of support is building between 1810 and 1780 on SPX. There is another line of support at 1750. If we continue down this coming week, those are likely levels to expect small bounces.

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Conclusion

We’re in a long term bear market, but getting some signs that we’re close to a counter trend rally. Sector sentiment shows capitulation, some value buying is occurring, and 7 day momentum is approaching extreme oversold levels. Watch the number of bullish and bearish stocks on any rally to see if people are buying or selling into it.

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Close to Oversold

Twitter sentiment for the S&P 500 Index (SPX) isn’t quite oversold yet. It’s getting close though. It appears to me that we need one more dip in price that carries 7 day momentum below -20 before we get a good counter trend bounce. You can view an interactive daily chart here. Scroll over the lines on the interactive chart to see the daily values.

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Let the Down Trend Resume

It appears as if the down trend for the S&P 500 index (SPX) is resuming. The most notable sign comes from 7 day momentum for SPX. It is turning down from below the zero line. When this occurs it usually means more pain ahead. With our breadth indicator below zero, bear market rules apply so we should expect downturns in 7 day momentum to precede strong declines. For those of you interested, I’ve been chronicling some of the “traditional” technical analysis indicators that indicate we’re in a bear market here.

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Breadth calculated between bullish and bearish stocks on Twitter is moving sideways, with the number of bearish stocks hitting new highs, but some value buying causing a slight uptick in the bullish count. Take a look at the stocks on the most bearish list (1 month) and you’ll see it littered with stocks that should be leading if we’re in a bull market. This doesn’t bode well for the market going forward. On the bullish side, you can see the stocks where value buying is occurring if you scroll to the bottom of the most bullish list. Of course, the top of the most bullish list shows the stocks that have held up relatively better than the market.

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Price targets gleaned from Twitter for SPX continues to show the same picture; no hope for higher prices and tweets calling for a retest of the last lows. There are also a lot of tweets calling for substantially lower prices. Expectations are clearly bearish.

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The sectors show some interest in basic materials and industrials. Two sectors that have been beaten down badly. This is another sign of some value buying occurring.

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Conclusion

It appears as if the downtrend is resuming. 7 day momentum is rolling over from below zero, the number of bearish stocks continues to make new highs as more dominoes topple, and price targets are all pointing down. Please keep you hands and feet inside the car at all times.

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